Hector Sants used his last speech as head of the City regulator to lay the
blame for the financial crisis at the door of the financial sector.

The outgoing chief executive of the Financial Services Authority said that mismanagement and incompetence at the corporate level had fuelled the crisis.

He said: "Ultimately, management are responsible for running firms and ultimately firms fail because of the decisions taken by their boards and their management. These decisions are made within a firm's corporate governance framework.

"The crisis exposed significant shortcomings in the governance and risk management of firms and the culture and ethics which underpin them. This is not principally a structural issue. It is a failure in behaviour, attitude and, in some cases, competence."

Speaking at an event in the City Mr Sants said that while planned changes to financial sector rules and supervision would reduce the risk caused by "bad decisions", it would not be eliminated altogether.

He said that while the regulator had a role to play, firms must take ultimate responsibility for their decisions, and that new capital and liquidity rules would not remove the necessity for management to make good judgments.

Mr Sants, who steps down in June after nearly five years as chief executive, said there needed to be a cultural shift within companies, with a move away from the domineering chief executives of the past to a board that understands its business model and potential risks.

Mr Sants said that banks needed to do more to responsibly incentivise workers and discourage excessive risk-taking. "Too often reward structures continue to encourage short-term gain and excessive risk-taking," he said.

He repeated his recommendation that board members of a bank that failed should not be allowed to carry out that role in the future. "The onus should be on the individual to demonstrate otherwise," he said.

Mr Sants said that he still believed people should be scared of the FSA, and that regulators and companies should be in a constant state of "constructive tension", rather than working in partnership.

His comments attracted critcism from Simon Morris of law firm CMS Cameron McKenna. "It is a shame he ends his last speech on the jarring note that 'people should be very frightened of the FSA'. This is quite wrong - even a judgmental regulator, like the new Prudential Regulatory Authority and Financial Conduct Authority, should command respect through informed dialogue and rational decisions. Only in a police state does one seek to rule by fear."